The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

The electric power industry is not competitive. Even in "deregulated" energy markets, electric utilities maintain monopolies over the delivery of electric power (at least to the extent it crosses public rights of way). The key advantage electric utilities get from their monopoly status is cheap capital.

"Securitization" transforms illiquid financial assets into tradable investment products. By standardizing and pooling assets, small ownership shares can be more easily valued and exchanged.

Asset-backed securities are comprised of payments on assets such as mortgages, auto loans and student debt. For example, the market for securities backed by auto loans expanded from less than one billion dollars in 1980 to more than $200 billion in 2000.

Securitizing solar assets (e.g., solar leases) could expand access to low-cost capital to smaller projects and expand access to the asset class for a more diverse range of investors who seek investment through a liquid, tradable product.

One strategy for addressing this potential volatility is allocating risk differently across the spectrum of investors. In particular, asset-backed securities are commonly configured into different "tranches," or segmented slices of the investment, each with a different risk level and credit rating.

Segmenting the investment into separate slices allows for more granular allocation of investment risk. The highest rated (lowest risk) tranche is paid first. The second-highest rated tranche is paid after the first tranche is fully paid, and so on. Investors can invest in a specific tranche based on their risk comfort and reward expectation.

Despite the risks, the rewards of securitizing solar are sufficiently high to have encouraged a clutch of new soon-to-be-visible start-up companies to pursue opportunities in this space. Check back soon to read more about those companies . . . .